When Operational Challenges Persist: Two Real-World Strategies Mirror Plant Diversification vs. Consolidation

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“Nothing personal, it’s just business”

As we’ve recapped in our monthly bulk material handling news summary, this statement now rings true at two Mondelez baking plants in Fair Lawn, NJ, and Atlanta, GA. In short, aging infrastructure and outdated production capabilities have led to “significant operational challenges” for these two once-proud facilities.

Faced with significant investments to update the plants, the decision to cease operation keeps in line with a strategy by Mondelez to “evolve its biscuit manufacturing footprint.” This may come as disheartening news for those close to the facilities, but another update from the world of ingredient handling revealed a separate strategy in the same month.

Anheuser-Busch announced it would refer $1 billion in sustainability projects to existing plants across 26 states. The move also aims to “support ongoing industry job creation and retention,” “stimulate economies in communities across the country” and “enable sustainable innovations.” These investments include close to $100 million for sustainability projects that include solar panel installments and water treatment.

While many factors enter into capital investment decisions, AZO has noticed specific trends across industries that rely on automated ingredient handling. Consolidating a company’s assets into “super plants” offers just one way to deal with economic uncertainty. In “Hybrid Manufacturing Operations for Flexibility and Resilience,” we elaborate on how other strategies (including “hybrid” options for facility modernization or consolidation) are being implemented by our customers. 

The fact that both Mondelez and Anheuser-Busch made these announcements during the same month (with opposite conclusions), gives us applicable examples of separate capital expenditure strategies. In this blog post, we look into three different criteria that can impact any company’s strategy. We start with risk management, followed by the benefits of multiple small capital investments and we’ll finish with a quick review of what we call the “hybrid” approach, which combines both consolidation and diversification.

Mitigating risk and dealing with uncertainty

For our purposes, we define “risk” as known hazards that happen unexpectedly. “Uncertainty” involves unknown hazards that happen unexpectedly (“unknown-unknowns” as Donald Rumsfeld famously explained). A risk for any manufacturer is unknown contaminants entering into production stream. Managers mitigate such risks with automation, careful process design and ingredient quality control. The coronavirus pandemic is arguably the best example of uncertainty as it led to huge product and demand changes overnight. Manufacturers can’t predict uncertainty, but they can plan for it by building flexibility as well as redundancy into their manufacturing and logistic infrastructures. 

Many managers are aware of their risks but often give little thought to uncertainty. While it is impossible to predict a global pandemic, it is possible to plan for supply, production or distribution disruptions. This requires a change in most manufacturer’s current mindset, but flexibility and quick action take forethought and practice. 

Modest capital investments can lead to big returns

Modest but continuous investments often generate significant returns on investment when process equipment and controls are modernized. All too often small capital investments are delayed or ignored. Over time, the lack of capital investment causes the plant to become outdated and less efficient. In the worst cases, a long-term lack of investment can lead to outdated systems, restructurings or even complete shutdowns. A few small (yet affordable) investments in existing facilities could include:

  • Controls upgrades
  • Improved dust control
  • Installations of VFD (variable frequency drives) on electric motors 

Of course, these are only a fraction of potential small investments that can yield big returns in existing plants. While greenfield investments offer a clean slate for management, the cost and time required to complete such projects are immense. A better course of action might be continuous (but lower total cost) capital improvements in existing plants. We at AZO would argue that capital improvements should be thought of as the ultimate preventive maintenance plan. 

Combining consolidation and diversification into a “hybrid” plan 

ESG (environmental, social, governance) issues prompt companies to expand their traditional business considerations with new urgent philosophies or values. In spending $1 billion to “stimulate economies in communities across the country” affected by COVID, Anheuser Busch seems to be dealing with ESG issues effectively. 

AZO General Manager Chuck Kerwin speaking at a conference

Here’s how AZO General Manager Chuck Kerwin sees this move (and Mondelez’s) both relate to long-term success in the marketplace:

“Internally, business managers also need to address technology short-comings in existing plants. Competition has never been tougher. Still, as we saw in the Mondelez example, competition inside a company cannot be overlooked either. Whether the capital is put into bulk material handling, controls upgrades or energy efficiency, every plant needs to fill a role and perform efficiently to succeed in the long-term. Self-preservation requires both management and employees to work together in order to remain viable in a highly competitive marketplace. 

While you hear much about factory consolidation, you don’t often hear of factory diversification — yet AZO has worked on any number of such projects in the past. Sole-sourced ingredients, production or logistics has been a huge production headache in the last year. Diversification, which raises fixed costs, is invaluable when problems surface. Diversification allows management to pivot quickly to respond to unplanned shutdowns, demand changes or sudden supply disruptions. These risks and uncertainties can’t always be forecasted, but a diversified infrastructure gives management a variety of options to deal with unforeseen problems.”

If you’d like to learn more about how a “hybrid” plan can aid a company’s resilience, feel free to take a look at our new (free) guide: “Hybrid Manufacturing Operations for Flexibility and Resilience.” Factory upgrades, flexibility and consolidation/diversification are just some of the key ideas presented in this new easy-to-read offering. AZO has more than seven decades of experience in handling raw materials and shaping ingredient automation along the way. Feel free to contact our sales team for any questions on how to help your plant and processes run smoothly.

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